Morning Report
Today's economic developments and market movements.
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Key Themes: Global equity markets moved higher overnight. Chinese stocks were a particular highlight, surging after the PBoC’s announced a significant package of monetary stimulus. This also drove a move higher in key commodities, with iron ore up almost 6%. US and European equities also rallied.
US bonds rallied overnight, and the US dollar declined across the board.
As a key commodity currency, the Aussie soared against the Greenback to reach its highest level since July 2023 – a touch under 0.6900. A brighter outlook for China, higher commodity prices and continued yield support are providing the Aussie with a tailwind. Improved risk sentiment saw commodity prices improve, with the price of oil and iron ore finishing higher.
Share markets: Global equity markets generally moved higher overnight.The S&P 500 rose 0.3%, supported by a bounce in tech stocks following the weaker-than-expected reading on consumer confidence. The tech-heavy NASDAQ unsurprisingly outperformed in this context, rising 0.6%, while the Dow Jones edged just 0.2% higher.
European markets also closed out with gains. The Euro Stoxx 50 finished 1.1% higher, while Germany’s DAX rose 0.8%. London’s FTSE 100 lifted 0.3%.
Chinese stocks rallied following the PBoC’s monetary stimulus package announced overnight. Shanghai’s CSI 300 rose 4.1%, the largest one-day gain since March 2024, while Hong Kong’s Hang Seng surged 4.1%, the largest one-day gain since July 2020.
Australia bucked the wider global trend of gains, with the ASX 200 falling –0.1% yesterday. Performances were mixed by sector – solid increases in materials and energy were offset by declines in financials and consumer staples. Futures markets are pointing to a positive opening this morning.
Interest rates: US treasuries rallied overnight, seeing the curve steepen slightly. The 2-year treasury yield fell 5 basis points to 3.54% and the 10-year treasury yield fell 2 basis points to 3.73%. Markets are more confident, at the margin, of the scale of near-term policy relief.
Markets are pricing in around 80 basis points of rate cuts this year, and still continue to expect circa 200 basis points of cuts through to next year.
Australian yields were little-changed across the curve overnight. The 3-year and 10-year futures yield both ticked 1 basis points lower to 3.34% and 3.90%, respectively.
Markets took a more dovish signal from the RBA’s communications yesterday and are now pricing in roughly 19 basis points of rate cuts by the end of the year, compared with 16 basis points at the start of the week. That is despite clear guidance that the Board still does not rate the prospect of a near-term rate cut. Markets are now fully pricing in four rate cuts through to the end of next year, in line with Westpac’s view.
Foreign exchange: The US dollar edged declined on the back of lower yields and the soft consumer sentiment read. The DXY briefly touched 101.05 before sliding to close 0.5% lowing at 100.32. The DXY remains vulnerable following the Fed’s 50 basis point cut to start its easing cycle. Weaker than expected consumer sentiment data, particularly related to the labour market, point to downside risks around full employment and the real economy. US Personal Consumption Expenditure inflation data to be released later this week will help provide a gauge on inflationary risks and further hints on the pace of future rate cuts.
The Aussie outperformed, with the AUD/USD pair soaring to break through previous resistance level and reach its highest level since July 2023 (0.6893). The AUD/USD pair was volatile increasing in the lead up to the RBA’s decision, but then falling after the presser where the RBA Governor revealed a hike was not explicitly considered. The AUD/USD pair then rallied hard following the PBoC’s announcement. The Aussie also notched up gains against the Euro and Yen.
A weaker than expected CPI outcome could see the rally continue and the Aussie break through the 0.6900 mark. As the Governor reminded us yesterday, this is good for inflation.
China’s yuan strengthened 0.6% against the Greenback hit a 16-month high, following the PBoC’s announcement. The Japanese Yen strengthened against the Greenback with the he USD/JPY down 0.3% to 143.21.
Commodities: Commodities were the bigger winners from the PBoC’s announcement.
Iron ore futures were up 5.9% to US$96.35/t. With the monetary stimulus aimed at supporting the property sector, iron ore prices were always going to get a tailwind, and with the prospect of further announcements, could rise further. Coking coal also jumped 3.6%.
Oil had a solid showing, with West Texas Intermediate oil futures moving 1.7% higher to US$71.56 per barrel.
Gold increased 1.1% to $2657.10 per ounce, marking a fresh record high.
Australia: The Reserve Bank Board left the cash rate unchanged at 4.35% in September, consistent with Westpac’s and the market’s expectation.
The Board’s policy statement was broadly unchanged in tone, repeating the language that the Board remains “vigilant to upside risks to inflation and is not ruling anything in or out.” The statement acknowledged the decline in headline inflation and that there was more to come. After all, the Board would have been reluctant to be too hawkish given the August Monthly CPI Indicator will be released today, which is expected to see headline inflation fall within the target range as various state energy rebates come into effect.
That is why the media release showed a clear pivot to emphasise the trimmed mean as the key indicator of the underlying trend in inflation. Yesterday’s communications highlighted that the RBA does not expect trimmed mean inflation to be sustainably in the target range until 2026.
Governor Bullock noted in the subsequent press conference that there was not an explicit consideration of a rate hike versus remaining on hold, as there was at the August meeting. Rather, the Board considered what would need to change to shift them from being on hold, a signal that the Board is a bit more firmly on hold than before, although it is still not willing to rule out rate hikes entirely.
Speaking on the rate cutting cycles that have begun in other peer economies, Governor Bullock emphasised the RBA’s strategy to raise rates by less than its peers did, in an effort to hold onto the gains in the labour market, noting that some of the peer economies that are already cutting rates have had much more marked increases in unemployment.
New Zealand: The Q2 Westpac-McDermott Miller Employment Confidence survey provided a downbeat update on the labour market. The headline index fell –2.2pts to 89.2, near pandemic-era lows. This was largely driven by a souring in the present situation, both current employment conditions and job availability fell sharply.
This mirrors the drawn-out slowdown grappling the broader economy, and points to the risk of further increases in the unemployment rate ahead. Despite the marginal uptick in some of the sub-indices tracking expectations households generally remain downbeat on the outlook for jobs. This reflects the labour market’s tendency to lag the economic cycle and suggests it will take some time before policy relief begins to see the labour market outlook begin to turn.
China: People’s Bank of China unveiled a package of monetary stimulus measures to revive the domestic economy. The 7-day reverse repurchase rate and the mortgage rate for existing borrowers were both cut yesterday, and guidance on upcoming cuts to the loan prime rate and deposit rates given. The PBoC Governor also hinted at households being able to refinance with another lender if their current lender cannot accommodate the planned 50bp mortgage rate reduction -- the average loan rate for existing first-home borrowers is approximately 80bps higher than for new. More importantly, the reserve requirement ratio was cut by 50bps and a willingness to cut further into year-end shown. The capital of the largest lenders will also be increased by authorities for the first time in over a decade. Paired with the RRR cut, this support for the banking sector will lead to a substantial increase in the funds available to be lent to households and businesses.
Important for sentiment and the functioning of markets, second home buyers are also being enticed to enter the market through a reduction in the minimum down payment from 25% to 15%. State-owned firms can also now borrow 100% of the principal needed to purchase unsold homes from the PBoC, up from 60% in May.
The PBoC Governor also announced at least USD70bn of ‘liquidity support’ for equity markets through a swap facility for market participants -- allowing less liquid existing holdings to be swapped for high-quality liquid assets to then fund or back additional equity purchases. A re-lending facility will provide a further circa USD40bn of liquidity, funding share buy-backs and additional cross-holdings. There was also reference to the potential establishment of a market stabilisation fund, and mergers and acquisition activity being encouraged.
A number of these initiatives are more likely to accelerate a rebound in activity and confidence than act as its catalyst. We still see need for additional fiscal support to encourage job creation and end house price declines. We will be on the look out for additional support for local governments and the property sector. A Politburo meeting is scheduled for coming days.
Eurozone: The Ifo Business Climate indicator for Germany declined to 85.4 in September from 86.6 in August, continuing the downtrend from 89 in May 2024. The outcome was lower than the 86 points expected by the market. Current conditions were the driver of September’s headline decline, the sub-index falling 2pts to 84.4 while expectations edged down 0.5pts to 86.3. Further rate cuts and more confidence over global growth prospects should support expectations in the near term and, in time, current conditions.
United States: Conference Board consumer confidence dropped 6.9 points to 98.7 in September, the biggest drop since August 2021, to be materially below the historic average. The present situation index declined 10pts to 124.3, the expectations series declined about 6pts to 81.7. As is often the case for this survey, views on the labour market look to be a prime determinant of confidence. The survey’s ‘labor differential’ (the difference between job plentiful and hard to get) has halved over the past year from 25.5 to 12.6 as job creation slows.
The Richmond Fed’s manufacturing index edged lower from -19 to -21 in September against expectations for a lift. Regional business surveys remain volatile in the US, but weak overall.
Governor Bowman explained her September meeting dissent in a speech overnight, highlighting greater concern over lingering inflation risks than the Fed’s FOMC overall and a preference to ease gradually as long as the labour market remains fully employed.
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